Regardless of whether the number of credit union charter conversions increases, we should pay more attention to related aspects not now receiving the attention they deserve.
From the member’s perspective, I cannot see a good reason to convert a credit union to a mutual savings bank (MSB) other than in response to credit union taxation. For this reason, the conversion hurdle should not be so insurmountable.
Tax Exemption is Important
Maybe (just maybe!) there are, or will be, other circumstances that have merit. But, in my view, conversions are all too often proposed and effected without truly evaluating what is best for the members, and after this, for the communities those credit unions serve.
In the case of the conversion to a mutual savings bank, that serves only its member/ owners, it would be very difficult to justify the loss of the credit union’s tax exempt status. The primary difference would be the charter, and it would be surprising if the difference would offset the significant loss of the credit union members tax advantage. Besides, society already has access to substitutes for tax paying credit unions. They are called mutual savings banks.
In the case of the subsequent conversion to a stock owned bank it would be even more difficult to justify the loss of both the tax advantage and the stock dividend paid to stock owners including management stock ownership, options, and other incentives. Again, not so surprisingly, society has widespread access to substitutes for this alternative. They are called banks.
Since these wide spread, easy to access substitutes are so readily available, why would we want to consider getting rid of one credit union to have one more mutual savings bank or stock owned bank? Could managers of credit unions outperform the managers of existing banks and MSBs by so much that they could offset the losses from the foregone tax advantage and the added cost of stock owner dividends? Are the reasons cited for conversions already solved by these substitutes or do we need more banks and MSBs to address the weaknesses of the Credit Union Act and regulatory process? Weakness such as the charter is too restrictive, capital growth is a problem, lending limits are too restrictive, NCUA is unfair . . .
Ought we also consider the economic loss of the tax advantage to a credit union’s community FOM? Does the community gain more from the members reinvestment of the tax advantage, and the related spending multiplier, or would the community gain more from the distribution of tax receipts though government spending? Do credit unions serve as a check and balance for profit banking entities? Do credit unions serve those of modest means within their communities (FOMs) and what is the value of this loss?
Should we be concerned with the “Johnny come lately,” sophisticated members, and management that will gain substantial undue equity at the expense of less sophisticated member/owners? MAYBE THE REAL STORY IS HOW A CONVERTED CREDIT UNIONS RESERVES IMPACT THE VALUE OF STOCK AFTER AN IPO. Should this be included in conversion disclosures?
Management’s Self-Interest and Sunshine
Finally, does management have an unfair advantage or conflict of interest in managing the process of charter conversions? Is management self-interest the primary driver of conversions? Do credit union trade associations and NCUA have a vested interest in maintaining the status quo? Is a society that permits a variety business ownership forms better off than one that offers fewer alternatives? Can we afford to lose one more credit union member to an alternative charter? Can we enhance the credit union charter to be viable in modern economic times? Should the loss of the tax advantage be part of the conversion disclosures?
In my view, conversions are all too often motivated by management’s self-interest. Because of this, the whole process needs more sunshine and scrutiny. The easy answer is to set the conversion bar so high no one can clear it. Because of other realities, the answer needs to be somewhere else. The problem is, self-interest left to it’s own direction will prevail. Those of us that are concerned for the future of credit unions need to “belly up to the bar” and effect a reasonable solution to this complex and pressing issue. As history tells us, will self-interest prevail or can this be managed? Am I wrong? What say you?